EXTENDED ABSTRACT
INTRODUCTION                          
Foreign Direct Investment (FDI) is seen by policy-makers as an instrument to back improvement, increment efficiency and progress innovation in developing economies. Be that as it may, to draw in a conventional stream of FDI, a nation must keep up peace and stability. A nation with higher conflict risk is more likely to get lower FDI than a nation with lower conflict risk. A common approach reaction to diminish conflict and turmoil in a nation is to extend military spending. Within the nations beneath security threats, increasing military spending to stabilize the economy makes a difference boost foreign investors certainty within the prospects of a secure investment return, driving to a higher FDI inflow to the nation (Thakur, 2021). Non-conflicting nations, foresee a lower in FDI attributable to an increase in military spending. Insufficient funding in infrastructure, human capital and R&D are a number of the elements which deter FDI in the face of an increase in military spending (Aziz & Khalid, 2017). Morever, military spending “crowds out” foreign direct investment by revealing a less-friendly business environment for investors (Acemoğlu & Robinson 2012). Based on the above description, the main purpose of this article is to investigate the cross-effect of military spending and armed conflict on foreign direct investment in the MENA region countries during the period of 2000-2021 using panel regression models. According to the reports of various statistical sources, such as UCDP/PRIO armed conflict dataset and SIPRI, the amount of armed conflicts and the share of military spending from GDP in some countries of this region are at high levels. On the other hand, the level of FDI inflows in these countries has been very small despite having a large population and a large market, abundant energy resources and a special geographical location that is very important for foreign investors. In light of this discussion the main hypothesis of this research is as follows: The impact of military spending on the net FDI inflows in MENA countries is negative and significant; but it can be expected that this negative effect will decrease in countries facing armed conflict.
 
METHODOLOGY
The model of this research is taken from the experimental study of Aziz and Khalid (2017) and is as follows:




(1)                                       




In the above relationship, the variables are defined as follows:
fdi: net inflow of fdi as a percentage of GDP;
mil: military spending as a percentage of GDP;
conflict: dummy variable for armed conflict;
mil×armed conflict: the interactive effect of military Spending and armed conflict;
x: control variables including: GDP growth, Gross capital formation as a percentage of GDP (capital) and trade as a percentage of GDP (trade) and : the error term. Also, in Eq. (1), countries are denoted by the subscript i (including 12 countries in the MENA region) and the subscript t denotes the time period (2000-2021). Data on military expenditure and armed conflict have been obtained from the SIPRI Military Expenditure Database and PRIO database, respectively. Data for fdi and all control variables have been obtained from the World Bank database. The estimation of the model has been done using the panel data analysis method, including cross-sectional dependence, panel unit root and panel cointegration tests and Fixed Effects (FE) estimator.
 
FINDINGS
Table 1 presents the estimated results. The part (A) present the estimation results of the model for all the studied countries. As expected, there is a negative effect of military expenditure on fdi, suggesting that as the country increases military expenditure, its fdi decreases. However, the interactive effect of military burden and armed conflict (mil×armed conflict) on the net fdi inflows is positive and significant at the 90% confidence level. It seems that military spending by reducing armed conflict and thereby creating greater security, appears to act as an attractor for private capital and leading to an increase in the net fdi inflows. Parts (B) and (C) of Table 1 show the estimation of the model without interaction effect and by dividing the panel countries into two categories of countries facing armed conflict and countries without armed conflict. Based on the results of part (B) of Table 1, the effect of military burden on the net fdi inflows in countries facing armed conflict in the MENA region is negative and significant at the 95% confidence level. A one percent increase in the military burden of these countries will reduce the net fdi inflow in these countries by about 0.05 percent. According to the results of part C of Table 1, the effect of military burden on the net fdi inflows in countries without armed conflict in the MENA region is negative and significant at the 99% confidence level. A one percent increase in the military burden of these countries will reduce the net fdi inflows in these countries by about 0.35 percent. Based on this, it can be said that the negative effect of military spending on the net fdi inflows in countries without armed conflict in the MENA region is greater than countries facing armed conflict in this region. Based on other results and in accordance with theoretical expectations, economic growth, gross capital formation and the degree of trade openness have a positive and significant effect, and armed conflict had a negative and significant effect on the net fdi inflows in the studied countries.
 
Table 1. Relationship between conflict, military spending and net fdi inflows
Source: Research results




variables


A


B


C




Coefficient


P-Value


Coefficient


P-Value


Coefficient


P-Value




All countries


Countries facing armed conflict


Countries without armed conflict




Mil


-0.149


0.019


-0.046


0.011


-0.349


<0.001




Conflict


-1.695


0.048


-


-


-


-




mil×armed conflict


-0.099


0.075


-


-


-


-




gdp growth


0.051


0.025


0.021


0.036


0.068


0.014




Capital


0.068


<0.001


0.032


<0.001


0.081


<0.001




Trade


0.041


<0.001


0.113


<0.001


0.052


<0.001




constant


1.154


0.351


-6.118


0.005


-1.973


0.403




adjusted R²


0.581


0.685


0.629




observation


252


144


108




number of countries


12


7


5




 
CONCLUSION
This study examines the hypothesis that military spending without a threat negatively impacts the fdi inflows, though, in the presence of a threat expanded military spending may help attract higher fdi inflows. The estimated results indicate that an increase in military spending without any armed conflict decreases fdi inflows. We posit that the results obtained are such due to the following reasons. Firstly, higher military spending diminish investment in countries’ physical, economic and financial infrastructure that makes investing in the have nation an unfeasible option for foreign investors. Secondly, higher investment in military equipment in a nation transmits a negative signal to foreign investors of a risk of unsafe returns on investment due to a potential military danger. But the interactive effect of military burden and armed conflict on the net fdi inflows is positive, that shows in conflict-prone countries, increasing the share of military spending in GDP can help attract fdi through the reduction of armed conflict. The robustness of the results obtained by separating the countries of the MENA region into two categories of countries facing armed conflict and countries without armed conflict has also been confirmed. Based on this, the results show that the negative effect of the military burden on the net fdi inflows in countries facing armed conflict is much lower than in countries without armed conflict. In light of the discoveries talked about over, the study suggests policy-makers to refrain from budgeting high spending on a country's defense in the absence of a significant political threat, so that fdi flows are encouraged into the country. In case of a significant military risk, however, it is imperative that the government spends a sufficient amount on military resources in order to attract and support higher FDI inflows.